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Detroit agrees to pay bondholders 74% on $388M claim in bankruptcy

Detroit will retreat considerably from a previous hard-line position it took in bankruptcy court toward unlimited tax general obligation bondholders, under a new deal offering them 74 cents on the dollar with insurers paying the rest.

The city in creditor negotiations with federal court mediators has agreed to pay $287.5 million, or 74 percent, on an allowed aggregate claim of $388 million with three UTGO bond insurers paying the balance. The bonds will continue to be repaid at their current terms.

The remaining $100.5 million — to be covered by insurers Ambac Assurance Corp., National Public Finance Guarantee Corp. and Assured Guaranty Municipal Corp. — frees up funds for the city to be applied to city pensioners in a special income stabilization fund to ensure that the “most vulnerable retirees” remain above the federal poverty line after bankruptcy.

Bill Nowling, communications manager for Detroit Emergency Manager Kevyn Orr, said about $50 million of that anticipated savings is earmarked for the stabilization fund, while $28 million to $30 million might go toward bond payments on which the city has defaulted, and unpaid post-petition bankruptcy expenses Detroit has incurred. The remainder would get deposited to the city’s pension plans, but it was not yet clear what that amount might be.

Details of that stabilization fund are expected to be included in an upcoming amended version of the city’s plan of adjustment — a proposal for settling more than $18 billion of debt with more than 100,000 creditors in 16 different classes that awaits review before Bankruptcy Judge Steven Rhodes.

If Rhodes approves the deal, as reached in mediation, the bond insurers also agree to dismiss their objections to the adjustment plan, as well as a pending lawsuit at U.S. District Court. They will also gain an additional lien on future state budgetary aid to Detroit, which would go to cover any shortfall if the city’s tax base continues to decline in value and it cannot collect enough to cover its 74 percent share under the deal.

In the most recent plan of adjustment, filed March 31, the city proposed to issue new bond notes to the class of unlimited tax general obligation bondholders worth about 15 percent of their present claims.

“This settlement was reached after intensive negotiating sessions over several months, sessions in which the parties’ interests were fully and vigorously represented …,” a statement from the bankruptcy mediators reads. “The mediators (helped) the parties to find common ground in reaching a resolution that reflects not only a fair settlement to the parties, but also creates an opportunity for the city to provide additional assistance to its retirees.”

The mediation deal covers only one category of general obligation bonds issued by the city, treated collectively as “Class 8” of city creditors under the adjustment plan. It does not apply to any water/sewer bonds, revenue bonds or other notes that any of the three insurers might have covered elsewhere.

Kevin Brown, managing director of corporate communications for National Public Finance Guarantee Corp., said: “Our agreement with the city confirms the special status of the unlimited tax general obligation bonds and ensures that pledged property tax revenues will be used to fund future debt service. The agreement also provides for additional security for the UTGO bonds in the event that tax revenues decline further in the future.”

John Axe, founder of Grosse Pointe Farms bond counsel law firm Axe & Ecklund PC, said the insurers likely decided the deal was preferable to costly litigation to oppose the plan of adjustment.

Assured and National Public Finance sued Detroit in November, claiming Emergency Manager Kevyn Orr’s plans to cut bond payments was illegal, and all three had filed objections to Detroit’s plan of adjustment with creditors earlier this week.

Axe said a dispute over the legality of impairing that type of bond could have gone all the way to the U.S. Supreme Court.

“The bondholders will continue to get what they’re owed under this deal, and that’s important,” he said. “But the bonds also would be paid out of the city’s tax revenue collection in the future, and the city can collect what it needs to do that. So the insurers could have prevailed, but until that determination was made (in the courts), that’s just a matter of opinion.”